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Cybercash on Vacation
By Peter Wayner March 2005
Back in 1996, a small handful of cryptographers, bankers, and blue-sky
thinkers were debating, on Internet mailing lists, the future of money,
when one of them came up with a brilliant idea. If they formed an
organization, booked a Caribbean hotel in the dead of winter, and put a few
papers through the peer review process, they could get their bosses to pay
them to hang out in person. They could sit in the sun and dream about what
it would take to move cash, settle debts, sell things, sign contracts, and
extend credit in the virtual world.
Bob Hettinga, an organizer of the resulting Financial Cryptography
Conference, sounds a bit maudlin when he looks back at that first meeting,
which took place in February 1997 on the island of Anguilla: "It was like
all the net-dot-gods descended on Anguilla. Geeks, financial,
cryptographic, and otherwise. Cypherpunks. Bankpunks, pseudonymous
individuals, guys who would go on to become senior administration
officials, and even people who were paying the $1,000 conference fee in
cash because their corporate-sponsored lawyers told them to stay out of the
papers after various previous escapades."
This year's conference, taking place in February and March in the
Commonwealth of Dominica, doesn't have the same luster. The program is
jammed with papers about "privacy-preserving protocols" and "probabilistic
escrow" but contains little from the nonacademic world. The people who work
at actual financial institutions just aren't as interested in financial
cryptography as they were in 1997.
It wasn't supposed to be this way. In 1997, the bankers, lawyers, and
accountants were fascinated by what the digital magicians could do with a
few equations. Even though it's easy to make perfect copies of digital
files, for instance, mathematicians found a way to produce a digital $50
bill that would stymie counterfeiters. They didn't stop there. They
imagined transactions that avoided the overhead of a central clearing
house, digital currency that paid interest, and even complicated digital
rights management tools that locked up music, art, and writing with the
same equations used to protect money. Some talked about minting just 500
digital baseball cards for each player and letting the values rise and fall
with batting averages. In short, they imagined a world where wealth was not
frozen in gold and locked in vaults, but rather held in digital mechanisms
that could adapt to whatever people wanted. Some mechanisms could even be
as anonymous as paper cash, and transactions wouldn't require much more
than the click of a mouse.
But while the mathematics is still fascinating, the emergence of any system
based on it is receding into the nebulous future. Today, credit card
companies dominate the Web with a system that, at its heart, is little
different from the one that employed carbon-paper chits. One of the few
companies to find some success in financial cryptography, PayPal, gets most
of its revenue from eBay auctions, where it serves, in essence, as a
well-designed front end for the credit card system.
Adam Shostack, another of the original organizers, thinks that the reason
for the failure of financial cryptography is simple. "People are
conservative in how they pay for things," he says. Indeed, the problem for
financial cryptography's would-be pioneers is that the old credit card
system seems to be good enough for the new online world. If Amazon,
Wal-Mart, and other e-commerce sites can keep customers happy with plastic
cards, there's little demand for any of the more exciting ideas.
Joseph Nocera, author of A Piece of the Action, a history of the credit
card industry, says digital currency is facing "a chicken-and-egg question"
but points out that credit cards encountered the same problem, and that
their acceptance took decades. In fact, 2003 was the first year credit
cards and other electronic systems carried more payments than bank checks.
As they come to appreciate just how long the road ahead will likely be,
some financial cryptographers are searching for niches where they can
flourish in the short term. Take, for example, Waltham, MA-based startup
Peppercoin, the brainchild of MIT computer scientists Sylvio Micali and Ron
Rivest. Peppercoin is attempting to specialize in very small sums (see "The
Web's New Currency," December 2003).One of its bigger initiatives is
developing a cryptographic system that would enable people to use their
credit cards at parking meters, an application that would be prohibitively
expensive for the traditional credit card network, which has a minimum
transaction fee of about a quarter. If Peppercoin's technology can cut
transaction costs enough, it can capture this market and also make it
possible for people to spend small amounts online.
The inability to handle small change isn't the only weakness of the credit
card system that calls out for cryptographic innovation. Fraud and identity
theft cost society billions of dollars every year. Paul Syverson, a
researcher at the U.S. Naval Research Laboratory, believes this leaves the
door open for some of the new equations from this year's Financial
Cryptography Conference. The privacy-protecting mechanisms imagined by some
mathematicians also have the advantage of not relying on identity
verification to guarantee transactions. If the flow of money is anonymous,
there's no identity to be stolen.
Ultimately, Nocera believes, the high costs and fraud rate in the credit
card industry could give new life to the dreams of the original Financial
Cryptography Conference. "I actually happen to believe fairly strongly that
if someone could ever figure out how to get critical mass for a form of
cybercash that is not backed by a credit card," he says, "it would be a
transformative event for the Web."
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R. A. Hettinga